Discuss four inventory costing methods. List the four methods and briefly explain each.
- Average cost
- FIFO
- LIFO
- Specific identification
(a) Average cost-This inventory costing method in a periodic inventory system is based on a weighted-average cost for the entire period. At the end of the accounting period the average cost is computed by dividing the goods available for sale in units into the cost of goods available for sale in dollars. The computed unit cost then is used to determine the cost of goods sold for the period by multiplying the units sold by this average unit cost. Similarly, the ending inventory for the period is determined by multiplying this average unit cost by the number of units on hand.
(b) FIFO-This inventory costing method views the first units purchased as the first units sold. Under this method cost of goods sold is costed at the oldest unit costs, and the ending inventory is costed at the newest unit costs.
(c) LIFO-This inventory costing method assumes that the last units purchased are the first units sold. Under this method cost of goods sold is costed at the newest unit costs and the ending inventory is costed at the oldest unit costs.
(d) Specific identification-This inventory costing method requires that each item in the beginning inventory and each item purchased during the period be identified specifically so that its unit cost can be determined by identifying the specific item sold. This method usually requires that each item be marked, often with a code that indicates its cost. When it is sold, that unit cost is the cost of goods sold amount. It often is characterized as a pick-and-choose method. When the ending inventory is taken, the specific items on hand, valued at the cost indicated on each of them, is the ending inventory amount.
If the answers is incorrect or not given, you can answer the above question in the comment box. If the answers is incorrect or not given, you can answer the above question in the comment box.